Will This Real Estate Deal Work?
Stress-test rental and commercial property numbers against vacancy spikes, rising interest rates, and expense inflation before signing purchase contracts or making non-refundable earnest money deposits.
The 3 Critical Feasibility Tests for Real Estate Deals
Does the property generate at least +$200 to +$300 per unit/month net spendable cash flow after factoring in 8% management and 8% CapEx reserves?
Is Net Operating Income (NOI) at least 1.25x the annual debt service? Ratios below 1.15x risk loan rejection or severe cash flow distress.
What occupancy rate is required just to cover operating expenses and mortgage payments? Target a breakeven occupancy under 75%.
Operating Liquidity & Emergency Buffer Planning
Even with positive proforma cash flows, seasoned investors maintain a dedicated operating reserve fund equal to 3 to 6 months of total debt service and property operating expenses. This cushion protects equity from eviction delays or unexpected roof replacements during market downturns.
Calculating Your Downside Occupancy Breakeven Threshold
A property is insulated from foreclosure when its breakeven occupancy rate is significantly below the local submarket average. Calculate your breakeven occupancy using this formula:
If your property achieves breakeven at 68% occupancy in a submarket with historical 94% occupancy, you possess a 26% safety margin before experiencing negative cash flow, indicating strong investment feasibility.
3 Mandatory Downside Stress Tests to Run Before Making Offers
Professional real estate underwriters never evaluate properties solely under best-case proforma assumptions. Always stress-test your numbers:
Model a sudden increase in vacancy from 5% to 15% (e.g. 2 months of turnover downtime). If monthly cash flow turns deeply negative, build a larger 6-month operating liquidity buffer.
If using adjustable-rate or bridge financing, model an interest rate 150 basis points higher at debt maturity. Ensure the exit Net Operating Income covers balloon refinancing requirements.
Assume county property taxes adjust upward by 35% following acquisition. Verify that tenant rent escalations and operating margins can absorb the expense increase without compromising loan covenants.
Featured Underwriting Engines
Frequently Asked Questions: Deal Feasibility
How do I know if a real estate deal will work?
Verify positive cash flow, a DSCR above 1.25x, and a Cash-on-Cash return exceeding your investment hurdle rate.
What stress tests should every investor run?
Run vacancy spike tests, rate hike tests, and expense inflation tests to ensure the property remains profitable.
Understanding Commercial Debt Covenants and Loan Default Risk
Commercial real estate lenders enforce ongoing Debt Service Coverage Ratio (DSCR) loan covenants throughout the life of the loan. If property Net Operating Income drops and DSCR falls below the agreed minimum (such as 1.15x), the lender may declare a technical default, freeze cash distributions, or require immediate principal curtailment payments.
Always target an initial underwritten DSCR of 1.30x or higher to provide a comfortable 15% safety buffer against tenant non-payment or unplanned capital repairs.